Profit taking causes debt yields to move sideways

YIELDS on government securities (GS) ended mixed last week due to profit taking after the Philippine capital was hit by Typhoon Carina.

GS yields, which move opposite to prices, inched up by 0.71 basis point (bp) on average week on week on Friday, according to PHP Bloomberg Valuation Service Reference Rates data published on the Philippine Dealing System’s website.

Yield movements were largely mixed. At the short end, the rate of the 91-day Treasury bills (T-bills) decreased by 0.61 bp to 5.7294% on week on week, while those on the 182- and 364-day T-bills edged up by 1.67 bps, and 5.3 bps to 6.0390% and 6.1583%, respectively.

At the belly, yields on the two-, three-, four-, five-year Treasury bond (T-bonds) dropped by 2.87 bps (to 6.0370%), 2.46 bps (6.0893%), 1.19 bps (6.1469%), and 0.08 bp (6.1948%), respectively. Meanwhile, the rate of the seven-year T-bond went up by 1.62 bps (6.2488%).

Lastly, the long end of the curve rose week on week, with the rates of the 10-, 20-, and 25-year debt papers increasing by 2.56 bps (to 6.2759%), 1.91 bps (to 6.4019%), and 1.91 bps (to 6.4013%), respectively.

GS volume traded stood at P34.19 billion on Friday, higher than the P8.06 billion recorded on July 19.

Analysts attributed last week’s yield movements to the typhoon, which intensified monsoon rains and floods in the capital and nearby areas. Trading at the fixed-income market was suspended on Thursday (July 25) due to the typhoon’s impact.

“The bond market consolidated last week as players took profits given the onslaught of Typhoon Carina, which closed trading for one day,” Security Bank Corp. Chief Investment Officer for Trust and Asset Management Group Noel S. Reyes said in a Viber message.

Market activity thinned in the later part of the week due to the typhoon, causing yields to move mostly sideways, a bond trader said.

“The recent rally since a couple of weeks back lost steam as the market fully priced in expectations of a rate cut by the BSP (Bangko Sentral ng Pilipinas) this August,” Mr. Reyes added.

BSP Governor Eli M. Remolona, Jr. last month said the Monetary Board may deliver its first rate cut in over three years at their Aug. 15 review — the only policy meeting scheduled this quarter — as they expect inflation to continue easing until yearend, barring any shocks.

The Monetary Board could reduce benchmark borrowing costs by 25 bps this quarter and by another 25 bps in the fourth quarter, Mr. Remolona said.

The BSP last month kept its policy rate at a 17-year high of 6.5% for a sixth straight meeting following cumulative hikes worth 450 bps from May 2022 to October 2023 to help tame elevated inflation.

Last week, Finance Secretary and Monetary Board member Ralph G. Recto said the BSP remains “on track” to cut rates within the year to support economic growth.

“Additionally, stronger GDP (gross domestic product) numbers than expected for the US also influenced such a move as the market awaits further proof that inflation does not see a similar blip. Yields inched up by 2-4 bps week on week as a result and also was felt by the reissuance of the 20-year bond last week,” Mr. Reyes said.

The US economy grew faster than expected in the second quarter amid solid gains in consumer spending and business investment, but inflation pressures subsided, leaving intact expectations of a September interest rate cut from the Federal Reserve, Reuters reported.

Gross domestic product increased at a 2.8% annualized rate last quarter, the Commerce department’s Bureau of Economic Analysis said in its advance estimate of second-quarter GDP. That was double the 1.4% growth pace in the first quarter.

Economists polled by Reuters had forecast GDP rising at a 2% rate. Estimates ranged from a 1.1% rate to a 3.4% pace.

The growth rate in the first half of the year averaged 2.1%, half the 4.2% pace logged in the last six months of 2023. That is just above the 1.8% pace viewed by US central bank officials as the non-inflationary growth rate.

The Fed has maintained its benchmark overnight interest rate in the current 5.25%-5.5% range for the past year. It has hiked its policy rate by 525 bps since 2022. Financial markets expect three rate cuts this year, starting in September.

For this week, yields may continue to move sideways as the market awaits more economic data out of the US that could affect the Fed’s policy path moving forward, Mr. Reyes said.

Investors are also likely to wait for the actual start of the BSP’s monetary easing cycle before pushing yields lower, he added.

The market will take cues from the monetary policy meetings of the Fed and the Bank of Japan this week, the trader added.

The June US personal consumption expenditures (PCE) price index data released on Friday could also affect GS yield movements this week, the trader said.

US prices increased moderately in June as the declining cost of goods tempered a rise in the cost of services, underscoring an improving inflation environment that could position the Fed to begin cutting interest rates in September, Reuters reported.

The report from the Commerce department on Friday also showed consumer spending slowed a bit last month. Signs of easing price pressures and a cooling labor market could boost the confidence of Fed officials that inflation is moving toward the US central bank’s 2% target. The Fed will hold its next policy meeting on July 30-31.

The PCE price index nudged up 0.1% last month after being unchanged in May, the Commerce department’s Bureau of Economic Analysis reported. The increase in PCE inflation was in line with economists’ expectations.

In the 12 months through June, the PCE price index climbed 2.5%. That was the smallest year-on-year gain in four months and followed a 2.6% advance in May.

The Fed tracks the PCE price measures for monetary policy. — CWEL with Reuters